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Wilmar International’s Competitive Advantages

Wilmar International (SGX: F34) could perhaps be considered as one of the most complicated companies within the Straits Times Index (SGX: ^STI).

Many refer it as a black box, given the fact that it has many different commodities-related business segments and that it has operations all over the world. It also holds minority stakes and investments in many other companies in addition to its numerous joint ventures and associates. With that many moving cogs, it’s hard for an individual to really drill down into the details for each area within the company.

What we do know

However, we do know that Wilmar International is one of the largest palm oil plantation owners in the world with most of its plantations residing in Indonesia and Malaysia. The company has also been aggressively expanding in Africa and now has palm oil interests in about 10 African nations. It is also involved with businesses that deal with consumer products that are based on palm oil; one of its main activities in this particular segment is the distribution of cooking oil that’s derived from palm oil. It is one of the largest producers of such cooking oil in major markets like Indonesia, China and India.

Wilmar International has also been acquiring interests in the sugar industry over the past few years. Now, it can be considered as one of the major sugar producers in the world, with operations in Brazil, Indonesia and Australia.

What is Wilmar’s secret sauce?

As a value investor, the idea of a company possessing a strong competitive advantage (otherwise known as an economic moat) is often an important part of my investment thesis. So, with Wilmar being in the commodities trading business and being exposed to various regulatory and political risks, does it have any such moat to speak of?

I certainly think so. Unlike other commodity traders like Noble Group (SGX: N21) or Olam International (SGX: O32), Wilmar International tends to only enter businesses where it can control its own supply chain and become a vertically-integrated producer.

For instance, Wilmar’s oil palm business consists of almost the entire value chain within the industry: It plants oil palms in its plantations; it collects the fruits and mills them for crude palm oil; it then refines and processes the crude palm oil in refineries into different products like edible oils and oleochemicals. The company even has its own shipping operations (which according to its Chairman, is an extremely important part of its business) that transports its products directly to its end customers. In this way, the company is able to keep costs to a minimum and remain relatively unaffected by the volatility of commodity prices.

Foolish Summary

Wilmar International has a unique vertically-integrated business model that might not be as easily duplicated by its competitors. However, as investors, we have to realise that the company is still in a commodities-related business  in which control over the global pricing of its products is either minimal or non-existent.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim owns Wilmar International.